1

Competition is good for the health care industry.  Competition applies to all industries including health, improvements in methods and processes leading to costs being driven down. Competition in the health industry results to innovation which leads to better and new methods as well as approaches which spread rapidly and widely. This results to the unstructured providers to be restructured to be more competitive or risk being driven out of business. The prices which are value adjusted therefore fall leading to the expansion of the market in the health industry leading the market to be well-functioning, (Cooper, 1994).

Competition helps health systems advance in trying to counter the challenge of delivering broad access to health services while at the same time controlling costs and improving the health care costs. This is because competition is a proposed solution to address the element of the challenge elegantly. A framework by health system to use competition to promote efficient and high-quality care can be framed using the available evidence to ensure success in the health care industry. Competition can be deployed and designed to create incentives which are potent and which encourage innovation among providers to deliver high quality at a lower cost, (Greenberg, 2002).

An example of the importance of competition in the health care industry is the case of private health care in the U.S which seems not to be working. There is inefficient regulation of the market which drives prices up hence undermining quality in the power and profit search. This has resulted from deficiencies in regulation and the market forces hence customers do not get their money value according to Hillestad  & Berkowitz (2004). Another instance is that poor performance is also contributed by the public and private sectors characteristic that purchasers are passive quality and price takers and providers being quality and active price makers.

 

 

2

 

 

As a consumer of health care, I have certain expectations when utilizing health care facilities in addition to a friendly greeting, ensuring airway, circulation and breathing, external bleeding control, and the courtesy of a sitting place. I have expectations on the pre-service depending on clinical need or country including emergency medical services. Among the expectations of a health-service is the provision of transport operation to simply take the patients from their living locations to the medical centers. The health care facilities should also be able to provide a pre-service that determines whether a patient can be treated where they lie or be taken to the facility (Hillestad & Berkowitz, 2004).

My point of service expectations when utilizing health facilities involves improvement of ED cash flow and customer experience. This is whereby after receiving treatment the patient leaves without paying the bill to receive the bill copy a few weeks later sent to the insurer who pays a portion of the bill. I would expect a short collection cycle which is less time consuming and confusing. Another point of service expectation is getting experienced health care from a network of providers and doctors. As well the health care facility should have options for HMO, PPO or POS health plans (Nah & Dawodu, 2007).

After services which are among my expectations on utilizing health services include foremost transport services after treatment which can either be taxis funded by the facility or ambulance services. The health care should also have a developed after-hospital trauma care. Among the factors that would discourage me from using a health facility in my community includes poor productivity of healthcare facility relative to other health care facilities. Another is poor coordination of pre-services, point-of-services and after-services in the healthcare facility (Ashley & Rourke, 2002).

 

3

 

 

Directional strategies are characterized by stability, retrenchment and mostly whether there is a determination for the business should grow, maintain the current activities or be reduced. Growth strategies which involve either the business growing vertically or horizontally or through diversification which is growing through conglomerate or concentric diversification. For instance, if a hospital decided to employ directional growth strategy it may choose to grow vertically by taking over previous functions provided by a distributor or supplier. This maybe inform of purchasing sterilizing equipment for surgery, or opening an out-pharmacy for patients cutting out suppliers.

Complex adaptive strategies need requirements like healthcare facilities being dynamic and nonlinear; they do not reach fixed-equilibrium points inherently hence the system behaving to be chaotic or random. Another requirement is that the facilities should be composed of independent agents with behavior based psychological, physical, or social settings rather than the system dynamics demand. Agent’s needs in adaptive strategies should have a high likelihood for the conflict of behaviors and goals, they are also self-intelligent, and self-organized.

 

One of the requirements for market entry strategies includes strategies to penetrate the existing market for instance using price reductions. Another requirement is improving a service or product with a focus set on the niche market which is done by being innovative in the market place. Other requirements include; targeting new geographical markets, development of new distribution channels, and choice of matching marketing strategies. Characteristics of competitive strategies include; optimal positioning, accurate pricing strategies and advertising.

4

The change of strategies over time is crucial to strategic management. If changes are occurring in any organization-tactical changes, strategic changes, technology, leadership changes-then there are impacts and effects on the processes and people among other areas in the organizations. It is important to implement change management methodologies accurately with skilled resources delivering as well as executing the methodologies, processes and principles. This helps to minimize those effects and impacts from having negative outcomes hence use of strategies change is important. Change of strategies leads to minimization of possible negative outcomes and ensure positive results are increased. It helps to implement actions and approaches which should be customized to fit the circumstances of the organization (Paley, 2007).

Strategic change over-time can be accomplished by using a structured approach to transition the individuals, organizations, and teams from the current state to the desired one. It involves application to situations of downsizing, growing organization, or even accomplishing addition of new technologies. It is also accomplished by letting employees understand, accept, commit to and embrace the changes in the business environment they are working with. The accomplishment of strategies makes the organization more productive, innovative and productive (Ryan & Jones, 2009).

An organization can take stake holders buy into the changes by including them in the changes by using the principle of interdependency where the effect of stakeholders is fully recognized. Explaining to the stakeholders that understanding and skillfully executing various principles of the organization and change management is a necessity to success is also another way, according to Paley (2008). The interventions can be made to focus on the improvement of the stakeholder’s initiatives within the organization such as communication, change, process and culture. Finally, harmonizing these changes with the needs of the stakeholders is crucial too.

5

 

Health care providers can define the market they wish to serve by defining the customer base they wish to serve and/or the services they wish to offer. The health markets can typically be analyzed following functions they serve including; offering health care financing, physician and nursing services, institutional services, input factors and professional education. Healthcare financing market involves diagnosis, prevention, and treatment of diseases, injury, illness, and other physical mental and physical impairments, (Piercy, 2012).

Health care providers can also the market that they wish to serve is determining the total area to be examined or the “overall area covered by the markets”. For example, for a large independent provider or a local multi-hospital system a good start is the examination of the metropolitan statistical area as a whole in where the provider is situated. It is normally not always possible for the service to pull out of the entire MSA. However, with the appropriate relationships and strategies which include affiliate staff and hospital stuff, coupled with appropriate meeting the patients within the MSA will use the services of the provider, according to Piercy (2012).

The ways of definition of the market they wish to serve by health care providers depends on the overall patient origin for the market area hospitals. The overall market should basically include represent 80% or more of the discharges from hospital within the specific area. This statistic should be achieved by including additional areas if the current one doesn’t give the percentage. The providers may even include the overall market by pulling patients from multi-state or even the national level, (Ryan & Jones, 2009).

 

6

Internal environment analysis plays an important part in the development of value adding support strategies. Internal environment analysis provides direction and serves as a basis for assessing the weakness of the organization-what the organization can do and what it cannot do. Additionally, it reveals the opportunities or the favorable conditions for the potential of the organization as well as threats or unfavorable conditions for an organization. Internal environment analysis is an important step in development of value adding strategies and should not therefore be underestimated, (Ray, 2005).

It is crucial in understanding resources, capabilities and uncovering of the potential firm weaknesses although some can be considered harmless, those which are related to specific needs should be minimized as much as possible. The role of internal analysis of the business environment is to help determine where resources are available or where they are not available so that the strengths and weaknesses can be identified. It also helps to decipher changes in the competitive environment, changes in social-cultural environment, changes in the legal environment as well as changes in the internal organization environment, cannon & tanner (2007).

Strategy formulation is vital in development of value adding support strategies because it is important in the well-being of an organization or a company. In corporate strategy formulation it helps companies or organizations to decide what line or lines of business to peruse. In the business or competitive strategy, it adds value to support strategies by setting a framework for success achievement in a particular business. Formulation of sound formulation strategies helps to facilitate several actions and desired results that would have been difficult in other ways, according to Ray (2007).

scholar

7

Action plans help in focusing of a company or organizations ideas and to decide the steps involved in certain dreams achievement. The important components of action plans includes; identifying objectives, setting objectives which are measurable and achievable, and prioritizing the tasks of the action plan effectively.  Others include identification of the steps needed for the achievement of the goals, the use of numberings or lists, being able to effectively work under pressure, and completing work before deadlines. Finally, action planning includes having a contingency plan in place, (King, 2004).

All the steps in the action are crucial to the final result because they all have a role in the action plan. However, some steps are more crucial than others implying that they can be ranged from the least to the most important and vice versa. The most important component of the action plan is the identification of one’s objectives. The least important similarly is the use of lists in the course of the action plan, according to king, (2004).

There are several reasons why identification of objectives is arguably the most important part of the action plan. It makes those executing the plan to keep track of where they are at a particular point of the plan, where they want to be, how they will get there, and the actions to take. There are reasons why the use of lists is considered the least important part of the action plan. The basic one is that it doesn’t contribute much to the final action plan because it’s mainly a definition of the steps clearly taken (AceMyHW.com).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Ashley, B. M., & Rourke, K. D. (2002). Ethics of health care: an introductory textbook (3rd ed.). Washington, D.C.: Georgetown University Press.

Cannon, M. F., & Tanner, M. D. (2007). Healthy Competition, Second Edition What’s Holding Back Health Care and How to Free It.. Lanham: Cato Institute.

Cooper, P. D. (1994). Health care marketing: a foundation for managed quality (3rd ed.). Gaithersburg, Md.: Aspen Publishers.

Greenberg, W. (2002). Competition in the health care sector, past, present, and future: proceedings of a conference sponsored by the Bureau of Economics, Federal Trade Commission. Washington, D.C.: Federal Trade Commission:.

Hillestad, S. G., & Berkowitz, E. N. (2004). Health care market strategy: from planning to action (3rd ed.). Sudbury, Mass.: Jones and Bartlett Publishers.

King, J. B. (2004). Business plans to game plans a practical system for turning strategies into action (Rev. ed.). Hoboken, NJ: Wiley.

Nah, S., & Dawodu, E. (2007). Establishing private health care facilities in developing countries a guide for medical entrepreneurs. Washington, D.C.: World Bank.

 

Data Collection  

Introduction:

Ballard Integrated Management Services, Inc. (BIMS) is a food and hospitality services company that provides services on a contractual basis.  On contract in particular is with Douglas Medical Center managed by Barbara Tucker.  On average, based on the last three years, the company expects to see an average turnover rate of 50-60% at this location.  However, the past four months the turnover rate has increased to 64%.  As standard practice, BIMS performs individual exit interviews which surveys employees who have terminated employment as a way to determine any issues within the staff.  Unfortunately, the management staff has not received any unexpected responses during the exit surveys and do not have any reasons or causes for the increase in turnover.

Present the chosen situation as an overview—problem, purpose, research questions, and hypotheses:

The problem for BIMS is that with a turnover indicator increasing, it is clear that employee morale is decreasing.  This is not only causing unexpected disruption in services, but also current employees are demonstrating a decrease in service and morale which is negatively impacting performance and BIMS’s reputation with DMC.  Unless the management staff can determine the cause for the increase in employee dissatisfaction, the company is unable to provide a solution to fix the problems and stop them from continuing to increase.  Therefore, it was decided that an employee survey would be administered asking employees questions regarding their levels of satisfaction regarding hours, working conditions, income, etc. in a way to get an indication as to what the underlying problem is.

Describe the instrument used for data collection:

To conduct the survey, BIMS developed a questionnaire and asked all employees to rate their level of satisfaction by indicating a range of numerical fields for each question that represented their level of feelings.  One indicated very negative feelings and five indicated very positive feelings.  This type of measurement is considered interval because the results can be classified and ranked.  The variables can be ranked one through five and a researcher understands that a two indicates negative feels and that a four expresses positive.  The end results for the survey can tally up the number of negative and positive responses to each question which will provide some insight as to where the main negativity is stemming from.

Identify types of data—quantitative, quantitative, or both—and how the data is collected.

 

BIMS Debbie Horner is a HR manager who decided to administer a survey to the staff.  Top management team was not allowed to take the survey; the remaining 449 employees had the survey distributed in their paychecks. The survey responses for employees are anonymous none of the employees have to put their name on the survey.  Also the survey was voluntary the employees where not required to fill out the survey. Debbie’s survey contain questions about working conditions, shift hours, quality of training, division of work, level of compensation, fair treatment, how long worked for BIMS,  internal company communications, job security, gender and are you a manager or supervisor. Each employee that answered the question had a scale of 1 to 5 with 1 listed as “very negative” and 5 listed as “very positive”. Employees were to circle the number that was closest to their view of work at BIMS.

Only 78 employees respond to the survey, which is a low percentage of employees that returned the survey. Team D identifies the survey as qualitative data because the responses are categorical.  BIMS focus will be on percentage results in each category and will be looking for information that will aid them in understanding the increase in employees leaving.

 

Identify the level of measurement for each of the variables involved in the study.

Once the type of data has been established the data is classified by the levels of measurement.  There are four levels of measurement and each level builds to the next level.  The first level used by Debbie is the nominal level of data. In the nominal level the qualitative variables are classified and counted. This level has no particular order of the qualitative variables.  The second level of measurement was also used, which is ordinal level.  In the ordinal level data is classified by a set of labels. Debbie has assign order to the responds of the employees; she has assigned 5 the highest response while 1 is the lowest response on the survey. The next level of measurement is the interval scale. In this level Debbie is measuring the attitudes response of the employees by using a scale of 1 to 5.  The data in this level is ordered by the amount of characteristics they have.  Since Debbie has created this numerical scale team D can coded, counted, and rank the data provided by the employees that returned their survey.

 

Code the data if you have not done so. Describe how the data is coded and evaluate the procedure used and clean the data by eliminating the data input errors made.

 

The survey was designed to apply a numerical value representing the satisfaction level or feelings each employee had regarding the specific question being asked.  In addition to specific questions, the survey asked general questions about the employee.  This was designed to allow the analyst the ability to review the data for specific types of employees.  This will help BIMS in understanding which employees are experiencing issues to identify the cause of the increased turnover rate and decrease in performance.

To analyze the data, it is important to fix any input errors.  This type of paper survey requires someone to manually input the results into a spreadsheet, which creates an opportunity for errors.  A noticeable error would be any answers coded to the number six.  Since the results should only indicate one through five in the question responses, any sixes were coded to fives.  Once the data was coded and cleaned the analysis data can be reviewed in several ways.

By creating an Excel spreadsheet to house the data, we can calculate the mean, median and mode values for each question.  Adding a filter to our spreadsheet will allow us the ability to filter between several sets of data filters, such as filtering to only include the results for housekeeping, employees over five years, male employees or managers only.  There are several options available to help draw possible conclusions to what is causing the current problem at BIMS.

Draw conclusions about appropriateness of the data to meet the purpose of the study.

 

The purpose of the study is to find out why the turnover rate has increase to 64% at BIMS.  The survey taken by the 78 employees includes questions about working conditions, shift hours, quality of training, level of compensation, fair treatment, internal company communications, and job security. Team D was not surprised with the results of the mean, median, and mode producing similar results. The results of the mean and median had no value higher than a 3 and no value less than a 2 for questions 1 thru 10, which include very few 2.  The mode value was 2 for question 1 thru 10. The mean, median, and mode for this analysis seem to fall below and were more negative against working conditions, shift hours, quality of training, and level of compensation, fair treatment, internal company communications, and job security.

Team D has reviewed the data from the BIMS employee survey and found the data to meet the purpose of the study.

Conclusion

            BIMS is a food and hospitality services company that provides services on a contractual basis, which has a low-skill nature of most positions available. The normal turnover rate at BIMS was 55 to 60% but in the last 4 months the rate has increased to 64% and replacing workers increases costs.  Debbie Horner the HR manager at BIMS created a survey and placed the survey in with employee’s paychecks. Only 17.3% of BIMS employees completed the survey, but low percentages are sometimes common in surveys.  Once the data was coded and errors removed the data was ready for reviewing. The mean and median were extremely close in data results not much separation. The mode on the other hand was lower than both the mean and median. Team D concluded that if BIMS work to improve its relations with employees BIMS could lower the turnover rate of employees.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Lind, D. A., Marchal, W. G., & Wathen, S. A. (2011). Basic statistics for business and economics (7th ed.). New York, NY: McGraw-Hill/Irwin.

 

McClave, J. T., Benson, P. G., & Sincich, T. (2011). Statistics for business and economics (11th ed.). Boston, MA: Pearson-Prentice Hall.

Get Online Homework Help Here!

 

 

 

 

 

Finance HW

5.  Antonio Banderos& Scarves makes headwear that is very popular in the fall-winter season.  Units sold are anticipated as:

Oct – 1000

Nov – 2000

Dec – 4000

Jan – 3000

 

If season production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup.  However, Antonio decides to go with level production to avoid being out of merchandise.  He will produce the 10,000 items over 4 months at a level of 2500 per month.

a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total

b. If the inventory costs $5 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent or the monthly rate)

 

Antonio Banderos and Scarves

Units Produced Units Sold Change in inventory Ending Inventory
October 2,500 1,000 +1,500 1,500
November 2,500 2,000 +500 2,000
December 2,500 4,000 –1,500 500
January 2,500 3,000 –500 0
 
 
 

Ending Inventory

 

Cost per
Unit ($5)

 

Inventory Financing Cost

October $1,500 $7,500 $75
November 2,000 10,000 100
December 500 2,500 25
January 0 0           0
      $200

 

 

14.  Collins Systems Inc is trying to develop an asset-financing plan.  The firm has $300,000 in temporary current assets and $200,000 in permanent current assets.  Collins also has $400,000 in fixed assets.

a. Construct two alternative financing plans for the firm.  One of the plans should be conservative, with 80 percent of assets financed by long-term sources and the rest financed by short-term sources.  The other plan should be aggressive, with only 30 percent of assets financed by long-term sources and the remaining assets financed by short-term sources.  The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.  Compute the annual interest payments under each plan.

b. Given that Collin’s earnings before interest and taxes are $180,000, calculate earnings after taxes for each of your alternatives.  Assume a tax rate of 40 percent.

 

Collins Systems Inc.

a.                     Temporary current assets                                                                 $   300,000

Permanent current assets                                                                      200,000

Fixed assets                                                                                              400,000

Total assets                                                                                            $900,000

Conservative

% of                                Interest             Interest

Amount               Total                                  Rate               Expense

$900,000            ×          .80 = $720,000     × .15      =     $108,000   Long-term

$900,000            ×          .20 = $180,000     × .10      =         18,000   Short-term

Total interest charge       $126,000

Aggressive

$900,000           ×              .30 = $270,000   ×    .15  =          $180,000   Long-term

$1,200,000        ×              .70 = $630,000   ×    .10  =              63,000   Short-term

Total interest charge                                                              $103,500

b.                                                                     Conservative              Aggressive

EBIT                                      $180,000                             $180,000

–Int                                          126,000                               103,500

EBT                                            54,000                                 76,500

Tax 40%                                    21,600                                 30,600

EAT                                         $ 32,400                              $ 45,900

 

 

Chapter 7

 

1. Beth’s Society Clothiers Inc has collection centers across the country to speed up collections.  The company also makes payments from remote disbursement centers so the firm’s checks will take longer to clear the bank.  Collection time has been reduced by two and one-half days and disbursement time increased by one and one-half days because of these policies.  Excess funds are being invested in short-term instruments yielding 6 percent per annum.

a. If the firm has $4 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up.

b. How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash?

 

Beth’s Society Clothiers, Inc.

a.                     $4,000,000 daily collections × 2.5 days speed up =

$10,000,000 additional collections

$3,000,000 daily disbursements × 1.5 days slow down =

$ 4,500,000 delayed disbursements

$10,000,000      additional collections

$ 4,500,000      delayed disbursements

$14,500,000      freed-up funds

 

b.                              $14,500,000      freed-up funds

x            6%      interest rate

$     870,000      interest on freed-up cash

 

17. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks.  Sales would increase by $100,000 if credit is extended to these new customers.  Of the new accounts receivable generated, 10 percent will prove to be uncollectible.  Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales.  The firm is in the 40 percent tax bracket.

a. Computer the incremental income after taxes.

b. What will Johnson’s incremental return on sale be if these new credit customers are accepted?

c. If the receivable turnover ratio is 6 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?

 

Johnson Electronics

a…….. Additional sales………………………………………………………………………………………..         $100,000

Accounts uncollectible (10% of new sales)……………………………………          – 10,000

Annual incremental revenue……………………………………………………………….          $ 90,000

Collection costs (3% of new sales)……………………………………………………          –   3,000

Production and selling costs

…………………………………………………………………………….      (79% of new sales)                           – 79,000

Annual income before taxes………………………………………………………………..           $  8,000

Taxes (40%)……………………………………………………………………………………………….           –  3,200

Incremental income after taxes………………………………………………………….           $  4,800

b.

c.       Receivable turnover = Sales/Receivable turnover = 6x

Receivables                            = Sales/Receivable turnover

= $100,000/6

= $16,666.67

Incremental return on new average investment   = $4,800/$16,666.67 = 28.80%

 

 

Chapter 8

 

2. Regis Clothiers can borrow from its bank at 11 percent to take a cash discount.  The terms of the cash discount are 2/15, net 60.  Should the firm borrow the funds?

 

                                                Regis Clothiers

First, compute the cost of not taking the cash discount and compare this figure to the cost of the loan.

The cost of not taking the cash discount is greater than the cost of the loan (16.32% vs. 11%). The firm should borrow the money and take the cash discount.

 

 

15.  Randall Corporation plans to borrow $200,000 for one year at 12 percent from the Waco State Bank.  There is a 20 percent compensating balance requirement.  Randall Corporation keeps minimum transaction balances of $10,000 in the normal course of business.  This idle cash counts toward meeting the compensating balance requirement.  What is the effective rate of interest?

 

Randall Corporation Effective rate of interest =

Required Compensating Balance  – minimum balance on
deposit = additional funds needed at bank

 

 

17.  Your company plans to borrow $5 million for 12 months, and your banker gives you a state rate of 14 percent interest.  You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stand alone.)

a. Simple 14 percent interest with a 10 percent compensating balance

b. Discounted interest

c. An installment loan (12 payments)

d. Discounted interest with a 5 percent compensating balance

 

a.                        Simple interest with a 10% compensating balance

b.                        Discounted interest

c.                         An installment loan with 12 payments

d.         Discounted interest with a 5% compensating balance

 

 

Chapter 9

 

11. If you invest $8,000 per period for the following number of periods, how much would you have?

a. 7 years at 9 percent

b. 40 years at 11 percent

 

FVA = A × FV IFA

a.         $8,000 × 9.20 =          $      73,600

b.         $8,000 × 581.83        =          $ 4,654,640

 

 

17. The Western Sweepstakes has just informed you that you have won $1 million.  The amount is to be paid out at the rate of $50,000 a year for the next 20 years.  With a discount rate of 12 percent, what is the present value of your winnings?

 

PVA = A × PVIFA (12%, 20 periods)

PVA = $50,000 × 7.469 = $373,450

 

 

35. Alex Bell has just retired from the telephone company.  His total pension funds have an accumulated value of $200,000, and his life expectancy is 16 more years.  His pension fund manager assumes he can earn a 12 percent return on his assets.  What will be his yearly annuity for the next 16 years?

 

 

37. You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $12,000 for 25 years after retirement.  During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money.  What annual contributions to the retirement fund will allow you to receive the $12,000 annuity?

 

Determine the present value of an annuity during retirement:

 

To determine the annual deposit into an account earning 8% that is necessary to accumulate $108,924 after 20 years.

 

 

Chapter 10

 

13. Tom Cruise Lines, Inc., issued bonds five years ago at $1,000 per bond.  These bonds had a 25-year life when issued and the annual interest payment was then 12 percent.  This return was in line with the required returns by bondholders at that point as described below:

Real rate of return – 3%

Inflation premium – 5

Risk premium – 4

Total return 12%

 

Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds.  The bonds have 20 years remaining until maturity.  Computer the new price of the bond.

 

Tom Cruise Lines, Inc.

First compute the new required rate of return (yield to maturity).

Real rate of return                           3%

Inflation premium                           3

Risk premium                                  4

Total return                              10%

Then use this value to find the price of the bond.

Present Value of Interest Payments

PVA = A × PVIFA (n = 20, i = 10%)

PVA = $120 × 8.514 = $1,021.68

Present Value of Principal Payment at Maturity

PV = FV × PVIF (n = 20, i = 10%)

PV = $1,000 × .149 = $149

$1,021.68

149.00

$1,170.68

 

23. The preferred stock of Denver Savings and Loan pays an annual dividend of $5.60.  It has a required rate of return of 8 percent.  Computer the price of the preferred stock.

Denver Savings and Loan